Debt deal done. So what? (excerpt)On the Trading DeskSM—
By Peter Nulty
Dr. Brian Jacobsen, CFA, CFP®; John Manley, CFA; and James Kochan, capital market strategists with Wells Fargo Funds Management, LLC, gathered to help investors navigate events unfolding in Washington in this excerpt of On the Trading DeskSM from October 18, 2013.
Brian, investors watching the equity markets over the last few weeks have seen moves tick up and down—sharp in some cases, but no wild swings. Is that a surprise?
Jacobsen: Not really. I think that it's a good illustration of how the market is a place where information is processed, including expectations. The market moved on the expectation that a deal would get done, and I think it was clear to most people that we've seen this play before in D.C. so we knew how the script would end. We saw an increase in volatility in the market, but it seemed to take it in stride, at least when you look at the equity side of the ledger. The fixed-income market seemed a little bit less sanguine.
And John, maybe you can go into a little more detail about the equity markets.
Manley: Well, actually for the markets and probably for me as well, it's as if it never happened. By the time the solution or at least the Band-Aid was put in place, the markets were pretty much back to where they'd been a few weeks ago after we got over our tapering scare. I think, on balance, the markets dealt with it fairly well. They went down sharply when they had to. They gave a message. And then when it looked like that message had been read and that people in Washington were beginning to act accordingly, the market started climbing back and started to recognize some of the longer-term fundamentals that are still in place.
Jim, how did the fixed-income markets react during this drama?
Kochan: There were some distortions in the market for Treasury bills, some nervousness about the bills that were going to mature first. The debt ceiling was raised, and we've seen a little bit of a relief rally, if you want to call it that, in the bond markets, in the Treasury market. Although I think that's perhaps more in anticipation of somewhat slower growth and Federal Reserve quantitative easing—that is, the purchases of Treasuries and mortgage-backed securities—continuing for quite a while. I think the distortions, the uncertainties, the delay in seeing economic indicators, all of this suggests that perhaps the Federal Reserve will continue with its purchases and not begin any tapering for quite some time. But other than that, it's been, as John said, a crisis that hardly happened.
Brian, how have the global markets reacted?
Jacobsen: Globally, equities rallied a bit on the news of a deal and also on the expectation of the news of a deal. And then we had somewhat of a relief rally in the markets as investor sentiment somewhat improved. There are also other contributing factors. We've gotten some decent data out of China as far as its GDP [gross domestic product] growth, a recent factor that's helped push equities somewhat higher. But overall, globally it seems like equity markets again took things in stride.
John, what values are you seeing currently in the equity markets?
Manley: Well, first of all I think the equity market is still a reasonably decent value. It's trading a little over 14 times consensus forward earnings, bottoms up. But that's really sort of the low end of normal for the last 20 years. An area that's a very good value is large-cap energy stocks. Oil prices are always hard to forecast, but I do tend to think that a lot of the big, multinational, integrated oil companies are not that sensitive to oil prices. They're strong cash-flow stories, they're dividend stories, they're high-quality stories, and I think they're value stories at this point in time. We like industrials also, but it's a strong fundamental story there and the values I think take a secondary, but not unimportant, seat.
Jim, where are the values now in fixed income?
Kochan: The municipal bond market. I think there are very, very good values in that market now. We have, for example, single-A munis in the eight-year and longer maturities that yield more than single-A corporates. That's a very unusual situation. And, of course, triple-As yield more than Treasuries, that's not as unusual. But you can see the values there. And because the yields haven't declined as much in municipals as they have, say, in Treasuries and other taxables, I think the best relative values right now are in the municipal bond market.
Jim, how about global fixed income?
Kochan: There has been a significant increase in spreads of emerging markets debt over domestic high yield. So, on the international scene, the emerging markets debt markets around the world are attractive again.
Brian, we'd welcome a parting thought?
Jacobsen: Investors should recognize that there will be drama coming out of D.C. or other parts of the globe in terms of politics. And it's important to keep your wits about you. Pay attention to historical examples to learn about how things like this could play out. And stay informed.
Jim, John, Brian, thank you so much for joining us.
All: Thanks for having us.
The views expressed are as of 10-23-13 and are those of Chief Portfolio Strategist Dr. Brian Jacobsen, CFA, CFP®; Chief Equity Strategist John Manley; Chief Fixed-Income Strategist James Kochan; Peter Nulty; and Wells Fargo Funds Management, LLC. The information and statistics in this report have been obtained from sources we believe to be reliable but are not guaranteed by us to be accurate or complete. Any and all earnings, projections, and estimates assume certain conditions and industry developments, which are subject to change. The opinions stated are those of the author and are not intended to be used as investment advice. The views and any forward-looking statements are subject to change at any time in response to changing circumstances in the market and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally, or any mutual fund. Wells Fargo Funds Management, LLC, disclaims any obligation to publicly update or revise any views expressed or forward-looking statements.